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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 126963  
Subject: Re: 1/1 FHA ARM vs. 30-fixed Date: 8/7/2001 4:19 AM
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Hi dexley,

I'm trying to decide if the risks offset the advantages or vise versa. Thoughts?

Deciding between a 1/1 ARM and the 30 year fixed is like deciding whether to get your 13 year old son a doll to play with or a shotgun. Both might be fine in a given situation, but neither is probably appropriate for your desires.

First off, you need to decide what ARE your outcomes? How long do you intend to wait before you're likely to consider refinancing or moving?

How young/old are you, and how far along are you in your financial independence building? Are you nearing retirement, or are you still working towards it?

For folks;
1) NOT within 5-7 years of retirement,
2) Desiring to build their net-worth the best, strongest, surest way over THE LONG RUN,
3) Desiring to eliminate the burdon of mortgage debt the fastest way strategically possible,
4) With the self-discipline not to raid their own financial safety net in non-emergencies,
5) AND the internal emotional stability and maturity to ignore the irrational public fear and despair when investments temporarily droop, and ignore the "irrational exuberance" and 'f'oolish giddiness when investments overly rally...

The best strategic choice is to BUDGET YOUR FUNDS to purchase your home on an 80-15-5 combo with a 30 year fixed loan, HOWEVER instead of a 30 year fixed, use a 5/1 ARM.

Every month take the difference you are saving in payments, and stuff it away in an investment account you've specifically set up for the purpose of eventually growing larger than your mortgage. When it DOES grow larger than your mortgage, you can have a ceremonial (but artificial) "Mortgage Burning Party."

You'll be investing in no-brainer index funds, or buying index tracking stocks... so it will take no investment skills on your part other than the skills you would have needed to pay your mortgage bill every month anyway.

At the end of your 5 year fixed period you will simply refinance into ANOTHER 5/1 ARM at the prevailing rates at that time. You will continue to pay the difference balance into your investment account (plus anything else you choose to contribut to your freedom account.)

In addition, when you refinance, you will reclaim the captured capital that has accumulated in your real estate equity from principal payments AND appreciation over the previous 5 years by taking the cash out in the new loan. You will immediately direct this capital right over to your Mortgage Freedom Account where it will join your other growth capital in compounding returns.

Rates will go up, and rates will go down... that won't faze you because you'll rest assured the differences between rates and real estate appreciation and inflation and equity market appreciation over the long run all work in your favor by this strategy.

Markets will rise and markets will fall... but over the long run you'll always experience the markets returning a bit stronger than their cyclical weaknesses... to the mnimum average of 8.4% annual positive returns, versus an average minimum of 3% in real estate. You'll see this as an almost 300% differential in your capital growth and the distance traveled on the path to your ultimate financial freedom.

Because you were so insightful to plan and prepare, then perservere and invest... your investment account will grow to overshadow your home mortgage (which also grew as you took cash out along the way.) The funny difference will be... your "Mortgage Burning Party" is happening approximately only 18 to 24 years after you took out your mortgage, instead of the full 30 years your neighbor is waiting for (since he bought the 30 year fixed loan plan... not very 'F'oolish!)

If you're now wondering what OTHER advantages you've experienced by taking this strategy, search for Mortgage Freedom Account among these boards, and surf the various strings involved. There are a lot of powerfully charged arguments both pro and con... and excellent decisions usually come from dissenting information... so drink deeply.

Good luck to you!
Dave Donhoff
MFA Strategy Maven
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